How does audit add value to the capital markets? While this has always been an issue for companies and their auditors, the financial crisis has brought the question into the full glare of the global public spotlight. KPMG's EMA Head of Quality & Risk Management, Rod Devlin, explores what this means.
I think the quality of auditing has significantly improved over the last decade. Post-Enron we went through major regulatory upheaval and revision, and that contributed to an increase in the rigor of audits.
There have been concerted efforts in revising standards, looking at the extent of work that auditors need to perform over risk assessment, the forward-looking information that underpins the preparation of financial statements and the judgments that underpin critical assertions in financial statements.
The bigger picture view of assigning a value to the audit is lowering the cost of capital. This cost is higher for entities that are not audited.
There’s also the public interest angle, although it’s more difficult to place a precise value on that. If audits were not useful in reducing the cost of capital, and if there were no public interest value in doing them, they would have been abolished a long time ago.
I believe that audit quality is fully compatible with efficiency. It’s incumbent on the profession to drive efficiency throughout the process.
Over the last decade developments in technology have reduced the costs of delivery at no detriment to quality. That is reflected in the fee structure. Some efficiency gains can be reinvested and distributed. But ultimately these gains find their way through into the marketplace and into firms’ fees.
People point to regulation and say because of the standards we can’t do things differently. I think that’s wrong.
There’s nothing in regulation which precludes innovation around the audit process and audit delivery. There’s nothing in regulation which constrains you from providing insights and added value to shareholders through audit committees.
The insight one gains from performing audits really does need to be shared with audit committees and through expanded reporting to audit committees – that’s where companies get real value from the audit.
Shareholder relations could improve by strengthening audit committees and by ensuring a healthy dialogue between the audit committee and investor groups, and between the audit committee and the auditor.
Audit committees often don’t play the role they should: understanding what their investor groups want and then challenging the auditor and providing investors with that information. The profession is relatively unconstrained in providing expanded audit reporting to audit committees around risks and controls based on the work they have done in the audit.
If the audit committees play their role properly then we should have happier shareholders.
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